The Globe and Mail’s market strategist offers five thoughts on the research, analysis and ephemera that has crossed his desk this week.
- Wells Fargo strategist Christopher Harvey reported that U.S. grocer Kroger Co. KR-N mentioned artificial intelligence (AI) eight times during its most recent earnings call compared with zero times a year ago. For Mr. Harvey, this level of enthusiasm implies an investor mania that will soon fade, and AI-related technology stocks are set to pull back. Wells Fargo does not, however, expect a re-enactment of the year 2000 implosion for technology – at least just yet. Mr. Harvey finds it unlikely that the U.S. economy and equities will head significantly lower in the near term, and added that it will take another full percentage point of rate hikes by the Federal Reserve before the mega-cap stocks currently driving the market head sustainably lower.
- Citing a recovering housing market, Citi foreign-exchange strategists raised their target on the Canadian dollar CADUS by a penny to US76 cents. Analyst Adam Pickett believes the Bank of Canada will remain hawkish relative to the remainder of the G10, with higher interest rates pushing bond yields high enough to attract foreign investment and support the loonie.
- Morgan Stanley strategists have been bearish and wrong so far in 2023 – a combination that capital markets departments usually view as bad for business. The strategy team remains pessimistic, in part because of continued inflation pressure that will push the Federal Reserve to further boost benchmark rates. Morgan Stanley Wealth Management’s chief investment officer Lisa Shalett recently wrote that 250 basis points of the approximately 325-basis-point decline in inflation was caused by weaker commodity prices and a strong U.S. dollar. These trends have largely played out but wage growth, arguably the most important kind of inflation, remains high near 8 per cent.
- Goldman Sachs U.S. economist Jan Hatzius sees only a 25-per-cent chance of a recession, but the firm’s U.S. equity strategist Cormac Conners thinks now is the right time for portfolio managers to buy downside protection for the S&P 500. Mr. Conners provides five reasons for his view. One, derivatives that benefit from higher stock prices are popular and expensive while derivatives that benefit from lower equity prices are less popular and attractively priced. It is, in other words, cheap to buy protection against lower stock prices. Two, the narrowness of 2023′s market rally implies a higher risk of market decline. Three, average valuation levels are elevated relative to history. Four, the strategist believes current stock prices are already discounting strong future economic growth that may not occur. And finally, money managers are no longer underweight equities, reducing any potential tailwind from that positioning. This is a case of Goldman advocating a buying-snow-shovels-in-summertime strategy – buying protection before everyone else wants it.
- BMO senior economist Robert Kavcic explained the important connections between a recovering housing market, inflation and the Bank of Canada in a Thursday research report. Mr. Kavcic noted the housing price increase in May, the first since the correction began in 2022, is an indication that the real estate market has bottomed. Rising home prices flow directly into consumer price index (CPI) data through rents, mortgage interest costs, replacement costs and real estate fees. The CPI is, of course, among the most important inflation measure and will always have the attention of the Bank of Canada. There is thus a direct connection between a stronger housing market and more interest rate hikes.